How to find profit using the Comparison Method

Incomplete Records

What you need

• The value of all assets and liabilities at the start of the period, to calculate opening capital.
• The value of all assets and liabilities at the end of the period, to calculate closing capital.
• The total drawings taken by the owner during the period, whether cash or goods.
• The total additional capital injected by the owner during the period.

Step by step

1. 1

   Understand the basic formula

   In the comparison method, net profit is the increase in capital that comes only from business operations. The formula is: Net profit = (Closing capital + Drawings) − (Opening capital + Additional capital). Drawings are added back because they reduce capital but are not a loss, while additional capital is subtracted because it raises capital but is not earned profit. Keep the accounting equation in mind: Capital = Assets − Liabilities.

2. 2

   Prepare the opening Statement of Affairs to find opening capital

   List all assets and liabilities of Perniagaan Setia on 1 January 2024, then apply Capital = Assets − Liabilities. Assets: Fittings RM30,000, Inventory RM10,000, Debtors RM6,000, Bank balance RM10,000, giving total assets of RM56,000. Liabilities: Creditors RM6,000. Therefore opening capital = RM56,000 − RM6,000 = RM50,000.

3. 3

   Prepare the closing Statement of Affairs to find closing capital

   Repeat the same process on 31 December 2024. Assets: Fittings RM27,000 (after depreciation), Inventory RM14,000, Debtors RM9,000, Bank balance RM22,000, Cash RM2,000, giving total assets of RM74,000. Liabilities: Creditors RM6,000. Therefore closing capital = RM74,000 − RM6,000 = RM68,000.

4. 4

   Identify total drawings

   Add up all the owner's drawings, whether cash or goods taken for personal use. Puan Aminah withdrew RM1,000 each month throughout the year, so total drawings = RM12,000. The original entry was Debit Drawings RM12,000; Credit Bank RM12,000. These drawings will be added back in the formula.

5. 5

   Identify additional capital

   Check whether the owner injected new capital during the period. On 1 July 2024 Puan Aminah paid RM8,000 of personal savings into the business bank account. The entry was Debit Bank RM8,000; Credit Capital RM8,000. This RM8,000 will be subtracted in the formula.

6. 6

   Substitute the values into the formula

   Substitute every figure: Net profit = (Closing capital RM68,000 + Drawings RM12,000) − (Opening capital RM50,000 + Additional capital RM8,000) = RM80,000 − RM58,000 = RM22,000.

7. 7

   Interpret the profit or loss result

   Because the answer is positive, Perniagaan Setia earned a net profit of RM22,000 for the year ended 31 December 2024. If (Closing capital + Drawings) is smaller than (Opening capital + Additional capital), the result is a net loss. Check that opening and closing capital were calculated from the Statement of Affairs.

Second example

Now consider Kedai Harmoni owned by Encik Rahim. On 1 January 2024 his opening capital (assets RM45,000 less liabilities RM5,000) was RM40,000, and on 31 December 2024 his closing capital (assets RM36,000 less liabilities RM6,000) was RM30,000. During the year Encik Rahim took goods and cash worth RM6,000 and injected additional capital of RM5,000. Net profit or loss = (RM30,000 + RM6,000) − (RM40,000 + RM5,000) = RM36,000 − RM45,000 = −RM9,000. Because the answer is negative, Kedai Harmoni suffered a net loss of RM9,000. This example shows that a closing capital lower than opening capital does not by itself mean a loss; drawings and additional capital must be taken into account first.

Common mistakes

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